A squandered legacy - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
A squandered legacy A  A  A

20 JULY 2013

At the start of its current term, the UPA Government inherited a healthy economy. GDP was growing at 8%, its fiscal deficit was under control and its current account deficit was manageable. Reliance on short term foreign borrowing to fund it was low, at just 3.9% of GDP.

The UPA, armed with the brain power of the likes of Dr Manmohan Singh, Dr Montek Ahluwalia, C. Rangarajan and P Chidambaram, squandered it.

Today GDP is growing under 5.5%, the fiscal deficit is running amok and the current account deficit is unmanageable, and has led to a sharp fall in the rupee. Reliance on volatile, short term funding is high, at 24.8% of GDP and the exit of foreign investors from the bond markets (after yields improved in the US) and also from the equity market, is causing a further decline in the rupee. In June 2013, ETFs (exchange traded funds) have pulled out Rs 4,338 crores.

The term of the UPA Government has also seen the eruption of various scandals, whether in the allocation of coal mine blocks, or of out of turn allotment of scarce telecom spectrum or others. It is easy to blame this on the compulsions of coalition politics (read: I will turn a blind eye to your misdeeds and corruption so long as you continue to politically support me) but in truth it is simply abysmally poor governance.

The exposes of these corruption scandals by the CAG then led to a policy paralysis, resulting in a slowing economy. The falling rupee, and the need to attract foreign capital to meet the current account deficit, means that the RBI has to raise interest rates, at a time when slagging economic growth demanded it lower them. As a result, consumption of items that are interest rate sensitive, such as automobiles, has fallen. As a result, companies like M&M had to terminate the services of 500 temporary employees at its Chakan plant.

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The policy paralysis also has, of course, its consequences. Posco pulled out of its Rs 32,000 crores project in Karnataka, as it was not given the iron ore mines (after other mine owners were seen to be exploiting theirs with blatant disregard for the environment) and because it faced opposition from locals. The locals, called Dongaria Kondhs, in Orissa, are now protesting the setting up of a bauxite mining project in the Nyamgiri Hills, which would jeapordise the Rs 40,000 crores investment plans by Vedanta Aluminium.

Walmart has decided to go slow in its retail joint venture with Bharti, because the method of getting myriads of licences it needs to set up the stores fall afoul of the US's Foreign Corrupt Practices Act. Bharti Walmart has returned 17 leased/rented properties to their landlords.

This is criminally poor governance. The India success story rests on the demographic dividend it will get when a young population comes into the workforce and starts to earn, and consume, propelling economic growth. But how will the dividend occur if they don't get jobs?

To give a perspective to the desperation to seek a job, there were 1,80,000 applicants for 680 jobs offered by steel maker SAIL.

Another bullish factor for the India story is that there would be a huge number of cities, each with a population of 1 million or more, coming up by 2030, according to a study by McKinsey Global. These new cities would provide 70% of the new jobs. But how will the new cities come up unless the method of converting agricultural land into non agricultural land (in order to house the 1 million people living there) is made more transparent. The joint venture between Dubai's Emaar Properties PJSC and India's MGF Development is under scrutiny because it has invested part of the money in agricultural land and Emaar is a foreign entity, which needs prior permission to do so. Right now the process of getting permission to convert is opaque and subject to misuse.

In an effort to stanch the criminalisation of politics, the Supreme Court has stated that anyone convicted of a criminal offence would be unable to stand for election, even if he contests the conviction. Upto now, the filing of an appeal against a conviction was enough to allow him to continue. The attempt is, indeed, laudable, and, if it cleanses the political arena of criminals, it would be wonderful. It could, however, be misused by politicians filing frivolous criminal complaints and manipulating lower courts into granting a conviction.

The telecom sector, once a shining example of the success of economic liberalisation, has been derailed after the spectrum misallocation scandal. The Government, desperate to raise revenue by selling scarce spectrum, is foolishly seeking to prevent an efficient use of it. Technologies now permit the sharing of spectrum and it would be sensible to permit spectrum sharing, from a national perspective as also from a consumer perspective. But permitting sharing would bring down the auction price of spectrum and so, the DoT is seeking to prevent it.

Strapped for cash, the Government has been aggressively selling its stake in public sector companies. It raised Rs 33,000 crores, through offer for sale issues of PSUs. However, post these OFS, the market cap. of the companies has fallen by Rs 2 lac crores. Foreign institutional investors have decided to stay away from PSU divestments for some time, though mainly due to concerns over the falling rupee, which reduces their $ returns.

In contrast, after Unilever pumped in money to recently raise its stake in Hindustan Unilever to 75%, its share price has gone up a whopping 16% in 9 trading sessions.

Despite the macro problems, the better managed companies are showing encouraging quarterly results for the June quarter. After Infosys declared better than expected results, so did TCS, with a increase in revenue of 16% in $ terms, and of 21% in Rupee terms, for Q1. Axis Bank, HDFC Bank, Kotak Mahindra Bank all showed good increases in net profits for the quarter.

Last week the BSE-Sensex added 180 points, to end at 20,149 and the NSE-Nifty gained 20 to close at 6,029.

What next?

The total debt of the top 17 industrial groups in India has gone up by 75% in the past 3 years, and the debts of these 17 is half the total debt of the top 500 companies. Rising interest rates and slowing sales growth will be bound to dampen profits. Interest rates would need to be kept high to defend the currency, and to attract foreign money to bridge the gap caused by the untenably high current account deficit, which is at 5% of GDP.

To reduce the deficit, the Government has attacked the # 2 import, viz. gold, making it very expensive to import it. Officially. This will not help curb demand, but would channelize the demand through unofficial channels. One way or another the country pays for it.

The Government is banking on higher FDI limits proposed by it, in different sectors, to bring in more foreign investment. In telecom it is proposing raising the limit to 100%. This would mean a windfall to the Indian partners, who could cash out. The proposal to hike FDI limit in the insurance sector would be opposed by the BJP in the monsoon session of Parliament.

It will, in fact, be open season for political pot shots, with all parties trying to sully the others' image. That would, but of course, negatively impact foreign investor sentiment. A lot of political dirty linen would be washed in public shortly. Time for caution.

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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4 Responses to "A squandered legacy"
Jul 21, 2013

This is a lucid overview of several factors that have negatively impacted Indian economy in the past few years and the current investment climate in the country.
Perhaps a brief outline of the global economic scenario during the same period and the adverse investment climate in several economies might have given a broader perspective. Of course this is no apology to the tardiness in several areas of governance and bureaucratic hurdles that India has to set right and set right fast.
The scams and the active role of the media in exposing them, the tireless work of lonely fighters against corruption like Dr.Subrmaniam Swamy and the Supreme court's no nonsense monitoring of the cases relating to them, the latter's directive that convicted criminals could not contest elections and overall civil society activism could perhaps be seen not as tarnishing our image as an investment destination but as a democracy trying to grapple some fundamental and endemic problems, which, in course of time ,would likely halt the impunity with which corruption and crime have been committed by politicians, bureaucrats, and businessmen so far. In the short term those who are used to bribing their way to business success would pull out their investments. In the medium to long term those who have yearned to see a corruption free regime that takes decision in a transparent and timely manner would come to India when the dust settles down and perceptible improvements in governance are seen.
Short term or long term, the “Hindu rate of growth” seems not so bad in today's global economic scenario. Who knows, it may be what the doctor ordered from the point of view of resource conservation and mitigating ecological degradation due to frenetic economic growth. Maybe more equitable redistribution of wealth and not economic growth per se is emerging as a necessity for mankind, failing which we may be facing catastrophes in several areas.
The problems of the budget deficit and current account deficit also could be seen in the broader global scenario. Discerning investors would likely weigh the structural problems of Indian economy against comparable economies elsewhere. It might not present a rosy picture but it is certainly not all gloom and doom. India might have faltered but certainly it is not a failed destination for prudent and level headed investors, notwithstanding the recent pull outs of some FII's and a few investors.
We should also take into account the fact that of late powerful economies seem to be taking decisions that are slightly out of sync with the genuine spirit behind the G-20 structure of international economic cooperation. There are no open price wars or exchange rate manipulations or trade barriers, of course. However, certain policies tend to be informed more by local political compulsions rather than by a global vision of hanging together and doing those things that are doable that are good for global economy as a whole. Opinions of experts in successful global economic cooperation need more consolidation and greater voice than what obtains now in various forums. Perhaps global economic cooperation as against competition needs more path breaking models to be evolved by expert economic thinkers. The future belongs to them.
These are generalities, of course. One hopes sharper minds would dwell on them and bring to bear their power of thought in these areas on political leaders so that no country is left behind in sustainable growth and development with least ecological damage.
Jul 20, 2013
Mr.Mulraj, Like other commentators, you are also falling into the trap of believing that telecom spectrum is "scarce" and therefore needs to be rationed or priced exorbitantly. If the government decides to choke the supply, even an abundantly available resource an be made "scarce". The quantum of spectrum available is the same for every country. When much heavier users like the US experience no "scarcity", how come India does?

Prof. Narender Jain
Jul 20, 2013
Why do you forget food security bill which is economically suicidal?
bhupendra prajapati
Jul 20, 2013
Respected Sir,
is it not due to faulty policy of Govt who boost automobile industry by opening of sector to foreigner along with cheap loan finance and tax incentive of depreciation on motor car to increase local demand for car which lead to higher import of crude oil consequently vitiate CAD and Fiscal deficit of India ?. instead of set right these dilemma Govt ban import of Gold.
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